POTOMAC FUNDS
INVESTMENT ADVISORY AGREEMENT
This Investment Advisory Agreement is made as of September __, 1997,
between the Potomac Funds (the "Trust"), a business trust organized under the
laws of the Commonwealth of Massachusetts with its principal place of business
at 000 Xxxxxxxxxx Xxxxxx, Xxxxxxxx, Xxx Xxxx 00000, and Xxxxxxxx Asset
Management, LLC, a New York limited liability corporation (the "Adviser").
WHEREAS, the Trust is registered under the Investment Company Act of 1940,
as amended (the "Act"), as an open-end management investment company consisting
of one or more investment series of shares, each having its own assets and
investment policies;
WHEREAS, the Adviser provides investment advice and is registered with the
Securities and Exchange Commission (the "SEC") as an investment adviser under
the Investment Advisers Act of 1940, as amended (the "Advisers Act"); and
WHEREAS, the Trust desires to retain the Adviser to perform investment
advisory services for each series of the Trust listed in one or more Schedules
attached hereto (collectively, the "Portfolios"), and the Adviser is willing to
perform such services on the terms and conditions set forth in this Agreement;
NOW, THEREFORE, in consideration of the premises and mutual covenants
herein contained, it is agreed between the parties hereto as follows:
1. APPOINTMENT. The Trust hereby appoints the Adviser, subject to the
direction and control of the Trust's Board of Trustees (the "Board"), to manage
the investment and reinvestment of the assets of each Portfolio listed on
Schedule A of this Agreement (as such schedule may be amended from time to time)
for the period and on the terms set forth in this Agreement. The Adviser accepts
such appointment and agrees to render the services herein set forth for the
compensation as set forth on Schedule A. In the performance of its duties, the
Adviser will act in the best interests of the Trust and each Portfolio and will
comply with (a) applicable laws and regulations, including, but not limited to,
the 1940 Act, (b) the terms of this Agreement, (c) the Trust's Declaration of
Trust, By-Laws and currently effective registration statement under the
Securities Act of 1933, as amended, and the 1940 Act, and any amendments
thereto, (d) the stated investment objective, policies and restrictions of each
applicable Portfolio, and (e) such other guidelines as the Board reasonably may
establish.
2. DUTIES AS INVESTMENT ADVISER.
(a) Subject to the supervision of the Board, the Adviser will provide
a continuous investment program for each Portfolio, including investment
research and management with respect to all securities, investments and cash
equivalents in each Portfolio. The Adviser will determine from time to time what
securities and other investments will be purchased, retained or sold by each
Portfolio. To carry out such decisions, the Adviser hereby is authorized, as
agent and attorney-in-fact for the Trust, for the account of, at the risk of and
in the name of the Trust, to place orders and issue instructions with respect to
those transactions of the Portfolios. The Adviser will exercise full discretion
and act for each Portfolio in the same manner and with the same force and effect
as such Portfolio itself might or could do with respect to purchases, sales, or
other transactions, as well as with respect to all other things necessary or
incidental to the furtherance or conduct of such purchases, sales or other
transactions.
(b) The Adviser will place orders pursuant to its investment
determinations for each Portfolio either directly with the issuer or through
other brokers. In the selection of brokers and the placement of orders for the
purchase and sale of portfolio investments for the Portfolios, the Adviser shall
use its best efforts to obtain for the Portfolios the most favorable price and
execution available, except to the extent it may be permitted to pay higher
brokerage commissions for brokerage and research services as described below. In
using its best efforts to obtain the most favorable price and execution
available, the Adviser, bearing in mind the Trust's best interests at all times,
shall consider all factors it deems relevant, including by way of illustration,
price, the size of the transaction, the nature of the market for the security,
the amount of the commission, the timing of the transaction taking into account
market prices and trends, the reputation, experience and financial stability of
the broker involved and the quality of service rendered by the broker in other
transactions. Subject to such policies as the Board may determine, the Adviser
shall not be deemed to have acted unlawfully or to have breached any duty
created by this Agreement or otherwise solely by reason of its having caused a
Portfolio to pay a broker that provides brokerage and research services to the
Adviser an amount of commission for effecting a portfolio investment transaction
in excess of the amount of commission another broker would have charged for
effecting that transaction if the Adviser determines in good faith that such
amount of commission was reasonable in relation to the value of the brokerage
and research services provided by such broker, viewed in terms of either that
particular transaction or the Adviser's overall responsibilities with respect to
the Trust and to other clients of the Adviser as to which the Adviser exercises
investment discretion. In no instance will portfolio securities of any Portfolio
be purchased from or sold to the Adviser or any affiliated person of the
Adviser. The Trust agrees that any entity or person associated with the Adviser
that is a member of a national securities exchange is authorized to effect any
transaction on such exchange for the account of the Trust which is permitted by
Section 11(a) of the Securities Exchange Act of 1934, as amended, and the rules
thereunder, and the Trust has consented to the retention of compensation for
such transactions.
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(c) The Adviser will report to the Board at each meeting thereof all
changes in the Portfolios since the prior report, and also will keep the Board
informed of important developments affecting the Trust, Portfolios and the
Adviser, and on its own initiative, will provide the Board from time to time
such information as the Adviser may believe appropriate for this purpose,
whether concerning the individual companies whose securities are included in a
Portfolio's holdings, the industries in which they engage, or the economic,
social or political conditions prevailing in each country in which the Portfolio
maintains investments. The Adviser also make available to the Board upon request
any economic, statistical and investment services normally available to
institutional or other customers of the Adviser.
(d) The Adviser will from time to time employ or associate with such
persons as the Adviser believes to be particularly fitted to assist in the
execution of the Adviser's duties hereunder, the cost of performance of such
duties to be borne and paid by the Adviser. No obligation may be incurred on the
Trust's behalf in any such respect.
(e) Any of the foregoing functions with respect to any or all Portfolios
may be delegated by the Adviser, at the Adviser's expense, to another
appropriate party (including an affiliated party), subject to such approval by
the Board and shareholders of each affected Portfolio as may be required by the
0000 Xxx. The Adviser shall oversee the performance of delegated functions by
any such party and shall furnish to the Trust with quarterly evaluations and
analyses concerning the performance of delegated responsibilities by those
parties.
3. SERVICES NOT EXCLUSIVE. The services furnished by the Adviser
hereunder are not to be deemed exclusive and the Adviser shall be free to
furnish similar services to others so long as its services under this
Agreement are not impaired thereby.
4. BOOKS AND RECORDS.
(a) The Adviser shall maintain records for each Portfolio relating to
portfolio transactions and the placing and allocation of brokerage orders as are
required to be maintained by the Trust under Rule 31a-1 of the Act. The Adviser
shall prepare and maintain, or cause to be prepared and maintained, in such form
and in such locations as may be required by applicable law, all documents and
records relating to the services provided by the Adviser pursuant to this
Agreement required to be prepared and maintained by the Trust pursuant to the
rules and regulations of any national, state or local government entity with
jurisdiction over the Trust, including the Internal Revenue Service.
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(b) In compliance with the requirements of Rule 31a-3 under the 1940 Act,
the Adviser hereby agrees that all records which it maintains for the Trust are
the property of the Trust and further agrees to surrender promptly to the Trust
any of such records upon the Trust's request. The Adviser further agrees to
preserve for the periods prescribed by Rule 31a-2 under the 1940 Act the records
required to be maintained by Rule 3la-1 under the 1940 Act.
5. EXPENSES. During the term of this Agreement, the Trust will bear all
expenses not specifically assumed by the Adviser incurred in its operations and
the offering of its shares. Expenses borne by the Trust will include, the
following (or each Portfolio's proportionate share of the following): (a)
brokerage commissions relating to securities purchased or sold by the Trust or
any losses incurred in connection therewith; (b) fees payable to and expenses
incurred on behalf of the Trust by the Adviser; (c) expenses of organizing the
Trust and the Portfolios; (d) filing fees and expenses relating to the
registration and qualification of the Trust's shares and the Trust under federal
or state securities laws and maintaining such registrations and qualifications;
(e) distribution fees; (f) fees and salaries payable to the members of the Board
and officers who are not officers or employees of the Adviser or interested
persons (as defined in the 0000 Xxx) of any investment adviser or distributor of
the Trust; (g) taxes (including any income or franchise taxes) and governmental
fees; (h) costs of any liability, uncollectible items of deposit and other
insurance or fidelity bonds; (i) any costs, expenses or losses arising out of
any liability of or claim for damage or other relief asserted against the Trust
for violation of any law; (j) legal, accounting and auditing expenses, including
legal fees of special counsel for the independent trustees; (k) charges of
custodians, transfer agents and other agents; (l) costs of preparing share
certificates; (m) expenses of setting in type and printing prospectuses and
supplements thereto for existing shareholders, reports and statements to
shareholders and proxy material; (n) any extraordinary expenses (including fees
and disbursements of counsel) incurred by the Trust; and (o) fees and other
expenses incurred in connection with membership in investment company
organizations.
The Trust may pay directly any expense incurred by it in its normal
operations and, if any such payment is consented to by the Adviser and
acknowledged as otherwise payable by the Adviser pursuant to this Agreement, the
Trust may reduce the fee payable to the Adviser pursuant to paragraph 7 hereof
by such amount. To the extent that such deductions exceed the fee payable to the
Adviser on any monthly payment date, such excess shall be carried forward and
deducted in the same manner from the fee payable on succeeding monthly payment
dates.
In addition, if the expenses borne by the Trust or any Portfolio in any
fiscal year exceed the expense limitations voluntarily imposed by the Adviser,
the Adviser will reimburse the Trust or Portfolio for any excess up to the
amount of the fee payable to it during that fiscal year pursuant to paragraph 7
hereof.
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6. LIMITATION OF LIABILITY OF THE ADVISER. The Adviser shall not be liable
for any error of judgment or mistake of law or for any loss suffered by the
Trust or any Portfolio in connection with the matters to which this Agreement
relate except a loss resulting from the willful misfeasance, bad faith or gross
negligence on its part in the performance of its duties or from reckless
disregard by it of its obligations and duties under this Agreement. Any person,
even though also an officer, partner, employee, or agent of the Adviser, who may
be or become an officer, trustee, employee or agent of the Trust shall be
deemed, when rendering services to the Trust or acting in any business of the
Trust, to be rendering such services to or acting solely for the Trust and not
as an officer, partner, employee, or agent or one under the control or direction
of the Adviser even though paid by it.
7. COMPENSATION. For the services provided and the expenses assumed
pursuant to this Agreement with respect to each Portfolio, the Trust will pay
the Adviser, effective from the date of this Agreement, a fee that is computed
daily and paid monthly from each Portfolio's assets at the annual rates as
percentages of that Portfolio's average daily net assets as set forth in the
attached Schedule A, which schedule can be modified from time to time to reflect
changes in annual rates or the addition or deletion of a Portfolio from the
terms of this Agreement, subject to appropriate approvals required by the 1940
Act. If this Agreement becomes effective or terminates with respect to any
Portfolio before the end of any month, the fee for the period from the effective
date to the end of the month or from the beginning of such month to the date of
termination, as the case may be, shall be prorated according to the proportion
that such period bears to the full month in which such effectiveness or
termination occurs.
8. DURATION AND TERMINATION. This Agreement shall become effective upon
its execution; provided, that with respect to any Portfolio now existing or
hereafter created, this Agreement shall not take effect unless it first has been
approved (i) by a vote of the majority of those trustees of the Trust who are
not parties to this Agreement or interested persons of such party, cast in
person at a meeting called for the purpose of voting on such approval, and (ii)
by vote of a majority of that Portfolio's outstanding voting securities. This
Agreement shall remain in full force and effect continuously thereafter until
terminated without the payment of any penalty as follows:
(a) By vote of a majority of its trustees, or by the affirmative vote of a
majority of the outstanding shares of such Portfolio, the Trust may at any time
terminate this Agreement with respect to any or all Portfolios by providing not
more than 60 days' written notice delivered or mailed by registered mail,
postage prepaid, to the Adviser at its principal offices; or
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(b) With respect to any Portfolio, this Agreement shall be approved for an
initial period of two year and at least annually thereafter by (i) the Trustees
or the shareholders of that Portfolio by the affirmative vote of a majority of
the outstanding shares of such Portfolio, and (ii) a majority of the Trustees
who are not interested persons of the Trust or of the Adviser or of any
subadviser, by vote cast in person at a meeting called for the purpose of voting
on such approval. If the continuance of this Agreement is not approved at least
annually after the initial two-year period, then this Agreement shall
automatically terminate at the close of business on the second anniversary of
its execution, or upon the expiration of one year from the effective date of the
last such continuance, whichever is later; provided, however, that if the
continuance of this Agreement is submitted to the shareholders of a Portfolio
for their approval and such shareholders fail to approve such continuance of
this Agreement as provided herein, the Adviser may continue to serve hereunder
in a manner consistent with the 1940 Act and the rules and regulations
thereunder with respect to that Portfolio; or
(c) The Adviser may at any time terminate this Agreement with respect to
any or all Portfolios by not less than 60 days' written notice delivered or
mailed by registered mail, postage prepaid to the Trust.
(d) This Agreement automatically and immediately will terminate in
the event of its assignment.
9. AMENDMENT OF THIS AGREEMENT. No provision of this Agreement may be
changed, waived, discharged or terminated orally, except by an instrument in
writing signed by the party against which enforcement of the change, waiver,
discharge or termination is sought. No material amendment of this Agreement with
respect to any Portfolio shall be effective except, if required by law, by vote
of the holders of a majority of that Portfolio's outstanding voting securities.
10. GOVERNING LAW. This Agreement shall be construed in accordance with
the laws of the Commonwealth of Massachusetts, without giving effect to the
conflicts of laws principles thereof, and in accordance with the 1940 Act. To
the extent that the applicable laws of the Commonwealth of Massachusetts
conflict with the applicable provisions of the 1940 Act, the latter shall
control.
11. DEFINITIONS. As used in this Agreement, the terms "majority of
the outstanding voting securities," "interested person," and "assignment"
shall have the same meanings as such terms have in the 1940 Act.
12. SEVERABILITY. If any provision of this Agreement shall be held or made
invalid by a court decision, statute, rule or otherwise, the remainder of this
Agreement shall not be affected thereby. This Agreement shall be binding upon
and shall inure to the benefit of the parties hereto and their respective
successors.
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13. MISCELLANEOUS. The captions in this Agreement are included for
convenience of reference only and in no way define or delimit any of the
provisions hereof or otherwise affect their construction or effect.
IN WITNESS WHEREOF, the parties hereto have caused this instrument to be
executed by their officers designated below as of the day and year first above
written.
Attest: POTOMAC FUNDS
By:_________________________ By:__________________________
Attest: XXXXXXXX ASSET MANAGEMENT, LLC
By:_________________________ By:__________________________
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SCHEDULE A
TO THE
INVESTMENT ADVISORY AGREEMENT
BETWEEN
THE POTOMAC FUNDS
AND
XXXXXXXX ASSET MANAGEMENT, LLC
Pursuant to section 1 of the Investment Advisory Agreement between the
Potomac Funds (the "Trust") and Xxxxxxxx Asset Management, LLC (the "Xxxxxxxx"),
the Trust hereby appoints Xxxxxxxx to manage the investment and reinvestment of
the Portfolios of the Trust listed below. As compensation for such, the Trust
shall pay to Xxxxxxxx pursuant to section 7 of the Investment Advisory Agreement
a fee, computed daily and paid monthly, at the following annual rates as
percentages of each Portfolio's average daily net assets:
Advisory Fee as a %
of Average Daily Net
Portfolios Of The Trust Assets Under Management
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Japan/Long Fund 0.75%
Japan/Short Fund 0.90%
U.S. Plus Fund 0.75%
U.S./Short Fund 0.90%
OTC Plus Fund 0.75%
OTC/Short Fund 0.90%
Money Market Fund 0.50%
Dated: September ___, 1997
